In this paper we examine some of the costs and benefits associated with mandatory audit firm rotation using data from Italy, where mandatory audit firm rotation has been in place since 1975. Previous studies on the subject did not find consistent evidence on the association between audit quality and mandatory audit firm rotation, but they omit to control for auditor fees. We address this void and specifically test whether (1) there is a change in audit quality associated with mandatory audit firm rotation after controlling for audit fees; (2) there is a change in auditor fees associated with mandatory auditor firm rotation. Our results indicate that audit quality, proxied by abnormal working capital accruals, improves following mandatory audit firm rotation, after controlling for audit fees. Moreover, the total amount of fees paid to the auditor do not change after the rotation, but the composition of total fees paid to the auditor (audit vs. non audit fees) does appear to change, with audit related fees increasing their percentage over the total fees.
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